Research Topics: Cash Flow Analysis

Produce a detailed cash flow for the first three years of the business

Going concern is a fundamental principle in preparing financial reports and a vital assumption applied by the reporting entity. When going concern is claimed, the business necessarily means to continue operations for the foreseeable future with no indication to cease trade, liquidate, or seek protection from creditors to pay obligations.  It also indicates the strength of financial statements and components that are being reported such as realizing assets and discharging liabilities.  Going concern assumption undergoes auditing procedures to test if the assumption is appropriate and subsequently protect the decision-making implications of investors, creditor, suppliers, regulators and other users of financial statements.     The three-year cash flow shows that the firm has the capability to survive over the long-term.  It has a net year end cash of £154,000; £137,000; and £377,000 for the first, second and third year respectively.  This is the result despite the company estimated a net loss for 2009 and 2010.  However, as several balance sheet contra-assets are non-cash transactions, the accountants of the company has minimizes and even eradicate the impact of net losses.  Depreciation, amortization, goodwill and asset impairment are drawn back to the cash flow of the firm.  These clearly suggest that the firm requires the use of its new and top-shaped non-current assets to bounce back in the going-concern trail.  To do this, the firm must invest heavily in expanding its property in the second year as well as short-term investments while continually paying its debts when they fall due.           Credit:ivythesis.typepad.com

Produce a detailed cash flow for the first three years of the business

Going concern is a fundamental principle in preparing financial reports and a vital assumption applied by the reporting entity. When goin...

CASH FLOW ANALYSIS

Jim Jones needs to identify the highest cash flow as well as the risk associated with it from his decision alternatives.  He can get numerical evidence to support such claim and be able to be guided according to derived computation.  To illustrate:   All UP                       Possible Cash Probability of  (CFx1)(Px1) (CFx1 – CF1) Dispersion Coefficient of  Flow (CFx1) Occurrence (Px1) =CF1 squared(Px1)   Variation                 5,000 0.20         1,000        2,888,000                     3,000 0.40         1,200        1,296,000                          -   0.20              -             288,000                    (5,000) 0.20        (1,000)        7,688,000     TOTAL 1.00         1,200      12,160,000 approx 3,487 2.91             CG on Helmets                         12,000 0.20         2,400      20,808,000                     6,000 0.40         2,400        7,056,000                    (5,000) 0.20        (1,000)        9,248,000                  (10,000) 0.20        (2,000)      27,848,000     TOTAL 1.00         1,800      64,960,000 approx 8,060 4.48             MS on Elctronics           15000 0.20         3,000      40,328,000     7000 0.40         2,800      15,376,000     -10000 0.20        (2,000)      23,328,000     -15000 0.20        (3,000)      49,928,000     TOTAL 1.00            800     128,960,000 approx 11,356           14.20             MM on Phones           30000 0.20 6000     180,000,000     10000 0.40 4000      40,000,000     -20000 0.20 -4000      80,000,000     -30000 0.20 -6000     180,000,000       1.00 0     480,000,000 approx 21,909 #DIV/0! Without UP           55000 0.20 11000     605,000,000     20000 0.40 8000     160,000,000     -35000 0.20 -7000     245,000,000     -60000 0.20 -12000     720,000,000       1.00 0  1,730,000,000 approx 41,593 #DIV/0!   With highest cash under alternative CG on helmets and UP the rest at 1,800 pounds, he is faced with greater risk or dispersion at approximately 8,060 (risk per unit of expected value at 4.48).  On the other hand, sub-optimal cash flow under all UP at 1,200 pounds carries with it lesser risk or dispersion at approximately 3,487 (risk per unit of expected value at 2.90).  Other alternatives are illustratively unattractive as they have very minimal cash flow that reach at break-even with a very ambiguous outcome (that is, the computed cash flow/ break-even has relatively larger fluctuations to real-life results).  Due to this, Jim Jones has to evaluate his liquidity.  If he is liquid, he might choose the alternative CG on helmets and UP the rest.  Otherwise, he should choose the less risky all UP.  On the other hand, he can minimize the risk of his market assumptions by hiring a research firm.  To illustrate (to settle CG on helmets relative risk): With Research Team to Minimize the Risk       2000 0.20 400      20,808,000     -4000 0.40 -1600        7,056,000     -15000 0.20 -3000        9,248,000     -20000 0.20 -4000      27,848,000       1.00 -8200      64,960,000 approx 8,060 -0.98     As shown by the computation, the deduction of 10,000 pounds for research fee to the expected cash flows aggravates the scenario for CG helmet and UP the rest alternative.  The research can be considered futile even though it makes the coefficient of variation less than 1 (in absolute terms) and makes the venture almost risk-free.  The same outcome is true when all UP alternative undergo the same process.  In effect, there is no other way Jim Jones can maximize his expected cash flow and minimize the risk of the top two alternatives other than his liquidity.                      Credit:ivythesis.typepad.com

CASH FLOW ANALYSIS

Jim Jones needs to identify the highest cash flow as well as the risk associated with it from his decision alternatives. He can get nume...

Finance Case Studies

1.      Like any decision-making strategy, corporate objectives should be initially emphasized.  In this specific case, ISGC should center its concentration in the immediate and long-term financial gains/ looses of the replacement and its contribution to overall corporate objectives.  On the verge of determining the rationality behind the replacement decision, there is a need for asset comparison between the old and potential machines which can only be derived in performance, dollar and timeframe terms.  In this respect, appropriate valuation techniques (.) would be identified and selected with reference to corporate standards, conditions and legal provisions.  On the other hand, decision-makers can be suggested to perform real option methods to eliminate the overly financial focus of budgeting ().  The reporter can solicit guide from his supervisor to determine the organizational hierarchy that can perform the method.  After the monetary and non-monetary approaches to budgeting has been applied, the favored option would be provided with clear cash flow analysis including any depreciation, betas and other factors that can affect estimates.  At the end, responsibilities will be distributed to respective staff and managers in order to monitor and carry out contingency actions until the life of the asset lapses.    2.      Incremental cash flow is the platform used to compare future cash flows of the firm with a project at hand against the current cash flows without the project.  The latter embodies incremental cash flow to start analysis as the organization reaches decision to invest only if the cash flow under the former exceeds the cash flow of the latter.  In addition, it also the basis for the firm to estimate the effects of tax liability that is automatically deductible from cash inflows (1999 ).  This makes the investment decision more financially and business relevant.  Sunk costs are present in acquiring a new equipment or machine like the cost of the machine itself, delivery costs and insurance costs.  The concept of sunk cost, usually discussed in economic framework, is useful in investment analysis because it tells that investments have its unrecoverable costs even if the after-purchase entails use or non-use of the asset.  In this regard, the decision becomes more responsible and strategic.  The latter represents the case of reselling the asset when forecasting fails to be obtained.  Incidental cost can aid in scenario planning which have the potential to curb natural difficulties and shield the forecasts of the firm from significant deviation.  For example, the optimal use of the asset is impeded by lack of raw materials which can have adverse effects on cash inflow.   3.      The sales forecast of marketing can be polished in different ways that depends on the concerned environmental entity.  It should be clear that every entity has its participation in altering the captured figures estimated by the firm.  With regards to customer behavior, direct marketing can provide a more accurate number of potential and existing customers.  By referring to this, the firm can have better understanding of customer needs and this practice also makes marketing staffs to present forecasted figures in minimum, maximum and optimal categories.  With regards to PESTEL and industry factors, the marketing department can outsource the services of a consulting firm, aside from staff trend observation, to minimize personal bias.  Competitor analysis can also be undertaken but the firm should be responsible and vigilant enough in using ethical or non-ethical methods.  The understanding of these entities can result to a marketing forecast that is classified through stratification depending on their potential reactions or pre-actions relative to the new technology.  The sales estimates would then be placed in analysis wherein selling price of the products will be determined.  However, since there is a ready information regarding the per unit price of baseball bat from the new machinery, the firm can use sales forecasts to rationalize cost structure, inventory and asset utilization (1999 ).  The estimates can have its huge implication on how the firm can manage its cost-effectiveness plans.   4.      The factors relevant to the initial outlay involve the starting cost of the acquisition of the new machinery.  This includes the cost of new equipment, shipping and handling costs, and insurance cost.  As observed, this resembles the sunk costs discussed earlier in which the firm can have no significant returns to expect in retrieving them.  Further, the sales from the old machine are included as it is part of acquisition since it will be inefficient to operate two machines at a certain optimal level well in fact one is enough.  However, it mitigates the initial outlay as part of the firm’s avoidance of its future depreciation and other associated costs and letting go of benefits derivable from it.       Initial Outlay     $ + New Equipment         350,000 + Shipping, handling and insurance costs             4,500 - Sales from the Old Machine        (100,000) TOTAL         254,500   5.      The interim cash flows inclusive to the computation are five years.  Although the ARR is very high compared to WACC of 15%, this can be an indication that the new equipment is very profitable.  However, it should be noted that this are not adjusted with market factors and present value in which the firm should be assertive of to have a more accurate representation of future cash inflows.  Depreciation is based on MACRS.           Cash Flow and Depreciation for the New Machinery (in dollars) Year Cash Flow** Depreciation*** Profit/ Loss Average Profit ARR**** (in percent) 1      3,162,500             70,000      3,092,500        4,286,202 6246 2      3,320,625           112,000      3,208,625 3      3,486,656             67,200      3,419,456 4      3,660,989             40,250      3,620,739 5      3,844,039             40,250      3,803,789 6*           20,000             20,300              (300) TOTAL    17,494,809           350,000     17,144,809 Notes:           * Reselling for the scrap value is disregarded and the machine is retained.   ** Cash Flow       2,750,000 Recent year sales with the old machine              412,500 increased by 15%                 3,162,500 Estimated sales with the new machine (1st year)         3,320,625 2nd               3,486,656 3rd               3,660,989 4th               3,844,039 5th               4,036,240 6th         *** Based on MACRS         **** Accounting Rate of Return         6.      To account for net working capital of the firm, 20% annual revenues will be reserved for structural reorganization within the firm as a result of the new machinery.  This can serve as support for an increased in stock level as a result of expansion of product offering or quality.  This annual reservation will be recovered at the end of the life of the new machine (e.g. after 5 years).  Due to this, the recoverable amount can be used as an assurance that the firm will not loose business if the machine or related operations lead to customer dissatisfaction and lost of sales.  In similar effect, the vague future conditions of external environment can be minimized with regards to its adverse effect to the firm.   7.      The interest expense in the bank can be minimized if the firm would be able to pay its balance in the least possible time.  The huge cash flows in the first years deducted by 20% net working capital reservation is fairly enough to cover the initial outlay of 4,500.    8.      The terminal year cash flow is relevant in financial analysis particularly in investment and budgeting because of its ability to estimate annual cash flows that a firm can have at specific number of years in the future.  The method allows the inclusion of the value of future cash flows to mitigate valuing problems.  Computation is less complex since the use of constant rate for a going concern firm is suggested.  When computed in present value terms, it can readily be added to the present value of free cash flows to determine the value of the business.  On the other hand, when the firm is planning for dissolution, the approach can easily show the bearing to defer or expedite dissolution stages as getting the returns for a certain number of years in the future is possible.  Thus, the approach is flexible and a tool for forecasting.  However, this strength have back clash making it necessary to consider some important factors.  The discount rate and growth rate undergo perpetuity which means that there value remain constant from year 1 to year N (the final year).  In the contrary, market conditions as well as internal performance of the firm are always vague especially on hi-tech and internet-based industries.  In effect, environmental scanning and internal audit should be used to be able to have a more accurate representation of future PESTEL, industry, competitor and corporate strategy implications to discount and growth rate.      9.      The presence of 3% in inflation can alter the amounts calculated earlier.  In this respect, PV method should be applied.  As observed, the present value of the future cash flow of the firm is higher compared to number 5 results (by at least M).  This suggests that the future cash flows of the firm is overstated and must be adjusted according to inflation.   Cash Flow Adjusted to Inflation of 3% Year Profit/ Loss Discount Rate Present Value 1 3092500 1.03         3,185,275 2 3208625 1.06         3,404,030 3 3419456 1.09         3,736,532 4 3620739 1.13         4,075,174 5 3803789 1.16         4,409,634 6* -300 1.19                 (358) Total           18,810,287     10.    The old machine should be replaced by the new machine as the very huge returns waiting for the company and relatively extraordinary profit.  This is shown both at PV and ARR method.    11.   This will have no bearing on computations.  The answer in number 5 showed that the 10-year operating life of the new machine has no bearing in its cash flow.  if any, the increased 15 years life of the new machine can intensify the real option of the managers to select the new technology as it is not only profitable but useful.           Credit:ivythesis.typepad.com

Finance Case Studies

1. Like any decision-making strategy, corporate objectives should be initially emphasized. In this specific case, ISGC should cent...

Assessing Cash Flow Forecasting in Public Financial Sector

Assessing Cash Flow Forecasting in Public Financial Sector Introduction Most common work of the public institutions is to serve the society in the most caring service they can give. From supporting the education to saving the lives of the children, institution varies according to their objective in serving the community. Institutions can be form of the government or private wherein there is a need of a common fund to spend in their vast list of programs. In a public institution, the funds came from different sources. It can be from the donations of the groups that supporting their goals, from the solicited donations, investments, or lending resources. From the various financial resources, public institutions should manage their funding well to use in the most appropriate program. Importance of Cash Management: Cash Flow Controlling the financial resources are the best attributes of every institutions. Public institutions need to ensure the efficient implementation of their proposed budgets. This can be done if there is an effective cash management. Spending is easy but gathering the resources is hard to find, therefore, the resources should be kept in a most reliable way and be spent in a timely manner. Cash management is the appropriate term in utilizing the financial resources while at the same time, minimizing the borrowing or liabilities from other institutions. It is very common in any institutions or businesses to handle the sound management and balancing the assets and liabilities. Out of the funds, the public institutions can create and handle the activities that are suitable in their objectives. Through the budget preparation or execution, management of the financial operations and other related task is risky. It includes the broad aspect of accounting, auditing, and evaluation and just like the businesses natural activity, public institutions should also establish informative financial reports. The financial reports can cover the different function in controlling the financial resources, as well as informing the leaders and helping them to decide on their next decision. Through the specific functions in treasury, the objectives and activities of the public institutions can be emphasized. Purpose of Cash Management Cash management established the vital purposes such as control in fund spending, implementing the budget efficiently, minimizing the liabilities, and maximizing the opportunity in using the resources. Controlling the cash is the key element in budgeting and the accountants or mangers should commit themselves in managing the funds. It is important that the accountants follow the appropriate guidelines such as collecting or paying the liabilities to minimize or lower the interests. The accurate and timely transactions are advantages for the public institutions for they can plan well on their next activities and ensure the budgets. In Relation to Government, Business, Banking, and Accounting Like in government spending, the cash management is also important to support the aim of the country for development. The focus of the public institutions in the cash management is complying in the allotted budgets and apart from the daily cash needs to secure that there is no financial issues within the organization. Cash means opportunity in all aspect of businesses and government sectors. Therefore, this opportunity should use wisely and be appropriate on the situation. A good cash flow management is a technique that describes the step in achieving the goal from the framework of all the organizations activities. By the simple means as an element of business, cash is the most liquid current asset. Through the relation of assets and liabilities in accounting, the cash is the greatest factor wherein a government, businesses such as banking institutions can perform well. In the proper utilization of cash, the payable liabilities can be deducted and the other receivables can transform into cash and turn into the other public activities. As for the public institutions, the cash should be managed in a cycle where the length of the operations of the institution can be satisfied. Conclusion The cash management policies can help maximized the daily cash flow and protect against the fraudulent actions. The public institutions can gain the confidence and have a great access in capital flow through the financing options and industry expertise. In addition, the benefits that the public institutions can gain are the flexibility and broad finance projects intended entirely for the community. If a person is dedicated to the organization, the services of the public institution can be well delivered. Through the expertise in cash management, the integration of the policies and the objectives can be achieved and the financial solutions can be available.     Sources: ADB – Cash Management and the Treasury Function [Online] Available at: http://www.adb.org/documents/manuals/govt_expenditure/chap8.pdf [Accessed 16 February 2011]. Maysami, R., 2009. Understanding and Controlling Cash Flow – Financial Management Series, U.S. Small Business Administration [Online] Available at: http://www.sba.gov/idc/groups/public/documents/sba_homepage/pub_fm4.pdf [Accessed 16 February 2011]. Regions Bank, 2007. Public Sector Banking [Online] Available at: http://www.regions.com/virtualDocuments/public.pdf [Accessed 16 February 2011]. Credit:ivythesis.typepad.com

Assessing Cash Flow Forecasting in Public Financial Sector

Assessing Cash Flow Forecasting in Public Financial Sector Introduction Most common work of the public institutions is to serve the soci...